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Explain the control of authorization of credit
Course:- Auditing
Reference No.:- EM132815




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Question: You have been given to work on the accounts receivable section of the 2013 audit of XYZ. You have completed your study of the internal controls or attribute sampling over sales and receivables and have decided that the input control over collectability of accounts receivable is the support of credit authorization) prior to shipping customer orders. This is verified by the initials of the credit supervisor on the company's replica of the sales order. The auditor has decided to utilize a sample size of 150.

The next step is to test to see if the control is operating as explained.

The following is provided.

Acceptable risk of incorrect acceptance (beta risk) = 5%.

Expected population deviation rate = 2.5%

Tolerable deviation rate = 6%

Based on the work done, you discovered that three sales orders did not have the credit supervisor's approval.

Required:

Prepared in good form a working paper and conclude whether the auditor can rely on the control of authorization of credit. Your working paper could add the sampling steps identified in the textbook for tests of controls.

Answered:-

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The required testing has been done for the testing of controls in the enterprise. In this process, the accounts receivable and the sales have been tested over a period of time. At the initial level the process of sales and the collectability of the same were understood. On the basis of discussion with the concerned person and the Standard Operating Procedures of the company it has been understood that the credit is provided to the customers on the basis of credit authorisation, in the form of initials of the credit supervisor of the company.




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